I’ve been promising for some time to write about what Republicans might and should do once they run Congress. There were some other posts I wanted to get to first because I like to keep things in chronological order, but I was inspired to put down a little bit about health care strategy after reading this article in the Wall Street Journal (registration required) this morning. Grace-Marie Turner lays out six options the Republicans have to “put the brakes on ObamaCare.”

She predicts that there will be an initial showdown on the whole thing- and hey, why not, no harm in trying a Hail Mary pass, burning up the phone lines, and seeing what can happen. It also gives Republicans a chance to show they are serious about both repealing and replacing ObamaCare. After all, we do need health care reform, the problem is that ObamaCare takes us in exactly the wrong direction. However, she’s also right that the chances of that sort of bill passing with Obama in the White House are essentially nil.

Here are her six ideas- Defund it, dismantle it piece by piece, delay it, disapprove regulations enacted on it, direct oversight and investigation, and delegation to the states. What this adds up to is far better than what I had yet considered. I had thought, well, we need to wait until 2012 and bring it all back up for the public to review right before the election. Her prescription is for almost all-out war on ObamaCare right through the entire Congress. I hadn’t thought of so many ways that Republicans could keep the issue alive for so long, but it seems they certainly can. I guess when you write a 2700 page bill, there is lots of bureaucratic machinery to gunk up and lots of unpopular bits to bring up, each of which sparks a political and media battle. This is where defunding it, delaying it, disapproving regulations, and oversight come in.

So keeping the issue alive is the first tooth on the key to repealing and replacing ObamaCare. The next tooth, once the issue stays potent, is staying on the right side of public opinion on the issue. This will be easier when Republicans are in Congress. Up until now, Democrats have been able to accuse Republicans of taking the most unpopular positions advocated by conservatives anywhere, in particular, by implying that Republicans want to repeal ObamaCare and replace is with nothing, and destroy Medicaid, Medicare, and Social Security to boot. With Republicans in Congress, the Republican position will be defined not by what Democrats accuse us of, but rather by what we actually try to pass. This is also part of the larger issue of rebranding the Republican Party as a party with real solutions and represents a major opportunity to rebuild trust with the public. The hard part is to consider and pass legislation popular enough to win support by large majorities and, on at least some issues, actually become law, while at the same time keeping the base happy and motivated even though what we (the base) really want has no chance of becoming law for another couple of years. This means defunding unpopular bits like the expansion of the IRS, dismantling elements which some Democrats are on the record as opposing or which are very clearly and directly harmful to the economy. Turner recommends delaying or eliminating the cuts to Medicare, and I would add that this must be done with caution. Republicans must avoid being tarred again with the big-spending brush. Big spending always hurts Republicans more than Democrats because it disheartens our base and lets Democrats paint us as hypocrites and spend and don’t taxers. When Democrats spend, their base loves it and people aren’t all that surprised. More importantly, big spending is just bad. However, until we can get proper reform in place, fixing the damage done to Medicare and Medicaid are political no-brainers, and people shouldn’t be hung out to dry in the meantime before we can start bringing down costs. After all, the Republican goal is not to dismantle these programs- its to open up the power of the free market to cut health care costs and make these programs affordable. For this to work, the base needs to be impressed with aggressive regulatory oversight and endless Congressional hearings which generate news and keep up the drumbeat for repealing ObamaCare.

The third tooth to the key is in presenting a viable alternative to ObamaCare that accomplishes the supposed goal of ObamaCare, which was drastically reducing the number of people who don’t have health insurance and is the opposite of what ObamaCare actually does, while reducing costs. There is only one way to cover more people for less money- the efficiency of the private market. Turner mentions delegating this to states, which is a fine idea. A lot of these ideas have already been implemented in one state or another, and having more states follow will help people in those states see how free market reforms work, and test out ideas for roll out with the national Republican health care agenda. Congressional Republicans should see to it that the federal government doesn’t interfere with these efforts, and it should introduce many of these reforms, along with ObamaCare’s repeal, in national legislation- at the beginning of the term, as they likely will, but also just before the 2012 elections. After another 2 years of experimentation, Republicans will have a better idea than ever of how to implement a popular health care bill that emphasizes cost savings through free-market principles. And it will be a great political move to put up such a plan before the elections. If health care is still one of the major issues in 2012, that is great news for the Republicans.

Saw an article in the Financial Times the other day (free registration required), and since this is the kind of stuff that people have a hard time understanding, and FDIC chair Sheila Bair and other pro-regulation types like to obfuscate, I thought I’d break it down piece by piece for y’all. Numbers correspond to paragraphs in the FT article.

1. Wrong, the most fundamental lesson isn’t that there was too much leverage. The most fundamental lesson learned in the recent financial crisis is that government shouldn’t interfere with the allocation of capital, in particular, by pushing banks to become instruments of social policy and give home loans to people who can’t afford it. Everyone would be better off if the government hadn’t done this, including banks who wouldn’t have imploded, people affected by the implosion, and even the people the government “helped” to get a loan. If they were renting, they could have moved to a cheaper apartment instead of going bankrupt. And government could do this because banks depend on government guarantees for their ability to compete.

2. Its funny, the passive voice “banks … got into trouble” avoids blaming anyone for the mess. It just mysteriously happened. The fact is, government policy and government bank guarantees, like the FDIC and off-balance sheet Fannie and Freddie paved the way for the collapse and the bailouts.

3. The solution is, predictably, more regulation which fails to address the roots of the problem, which are that lenders have become servants of government policy and dependent on government bailouts. Rather than ending the bailouts, Bair supports weeding out hybrid instruments, which are sophisticated new investment products which allow debt to automatically convert to equity under certain conditions. There is nothing fundamentally wrong with these instruments, they represent a less risky way for creditors to lend to businesses and for businesses to take on leverage. Its as though you got a student loan with terms that said that if you couldn’t make payments, you wouldn’t have to, and the bank would get a specified proportion of your future earnings in perpetuity instead. Maybe not a great idea, but its a fair contract and everyone knows what they’re getting in to. Her implication that these contracts “confuse debt and equity” is that financial professionals don’t know what these contracts mean when they enter into them. That’s simply laughable, its their job to know about these things. Its not that complicated. Adding new capital buffers, I’ll get to that later. Placing higher capital charges on riskier derivatives doesn’t make any sense- derivatives were invented so that risk would be explicit and known to the person taking on the risk. For instance, most derivatives contracts are owned by non-financial institutions. Fertilizer companies give fertilizer to farmers with the promise of being paid in the crops at harvest time. Rather than risk the price of the crop changing, they buy a call option that sets the future price and pass that risk on to the traders who want to take it. The problem with derivatives were that nobody knew what institutions bore which risks- a disclosure problem, not a derivatives problem, which is why people have recommended a clearinghouse for these instruments. While clearinghouses are in the process of taking on many of these derivatives to make the risks transparent to third parties who may engage in other transactions with organizations who own derivatives, Congress was vague and banks have enormous clout over how these rules are ultimately implemented. It is unclear whether effective rules will ever take effect, but the solution is not to discourage the use of derivatives, which is the effect of Bair’s proposal, but to write a better bill and bring price and ownership transparency, and stop kowtowing to the interests of the big trading banks. Another problem is that these rules and the financial regulation bill discourage the use of derivatives by all companies, including non-financial companies. These companies use derivatives to reduce risk and uncertainty, not boost profits by engaging in risky trades. This failure to exercise common sense may have severe unintended effects on businesses who had nothing to do with the crisis, negatively impacting the economy and jobs .

10. Bair cites academic studies against studies by actual banks to say that higher capital requirements will result in “only a .25 to .35″ increase in borrowing rates, as if that wasn’t bad enough. And is it surprising that the Basel Committee’s findings support the Basel Committee’s recommendations? There is a difference in methodologies. Essentially, payments on debts represent a business expense, unlike dividends and share buybacks, meaning its a tax-free form of capital financing. Here’s the kicker, which goes back to the adding new capital buffers, which I skipped earlier. Bair says this bias towards debt “narrows considerably in a properly regulated world where debt holders stand to lose in the event of a bank failure.” Since government guarantees on bank debt, aka deposits at the bank and interbank lending, are not going away, her statement is nonsensical. Debt holders don’t stand to lose in the event of a bank failure, the government will declare the failure a systemic risk and make the counter-parties whole. What she means is that new regulations raising capital requirements simulate bank capital standards in a world where there were no government guarantees on debt held by banks. Why not eliminate the guesswork and get rid of the FDIC and all other forms of government subsidies to banks?

You wouldn’t put your money in a bank with a 30-1 capital ratio without the FDIC, so banks wouldn’t have 30-1 lending to capital ratios without the government. It is clear that the entire concept of eliminating all future financial crises which took hold during the Great Depression was impossible. All that has happened is that risk has been transferred from private hands to public hands. What is the balance to take between less risk and more growth? Shouldn’t individuals and businesses be making that decision? As it stands today, banks undo government regulations while keeping government guarantees, then go hog wild and serve up giant bonuses. Then it all comes crashing down and the middle class taxpayer is left holding the bag. Is it really any better than when people lost their deposits in the Depression? The people who invested in the soundest banks, despite low interest rates, didn’t lose their money. This time around, it is the prudent debtor, saver, and taxpayer who is getting screwed. Its not just wrong, its damaging to the economy. We are in this financial situation today because of over 70 years of increasing moral hazard.

And here is the really scary part: the government had the money to bail them all out this time. One day the crash will be bigger, and government resources smaller. Then everyone from you to the banks to the government goes bankrupt. There is no other solution besides withdrawing government guarantees and letting banks fail (though we had better let things recover before we do it). Breaking up the big banks doesn’t really change anything- after all, there were more than 5 times as many banks in the US when the Great Depression struck as there are today. Higher capital requirements and better regulation have drawbacks, and get undone over time. Today, the government is tempted to run the banks, and the banks are tempted to take the government for everything its got.

We can’t change the way finance works. Sometimes financial crises happen. It’s better to have the people who take the risks bear the burdens. We are like the forest manager who refused to have controlled fires on environmental grounds. One day, all that underbrush goes up- and the whole forest burns down.

Lots to talk about today. I’ve been meaning to break down this years’ Senate races, but if you haven’t seen it already, Sean Trende has an excellent analysis of them race by race over at RCP, so I figured I’d just link to it and add my own thoughts. Its really great stuff, uses the kind of quantitative methodology I’m always drawn to myself.

In Illinois, I think that a formerly popular potential liar (Mark Kirk) beats a formerly popular potentially corrupt politician (Giannoulias), because corruption is simply worse than lying, especially in a year where government ethics and corruption is the second most important issue on Rasmussen’s 10-issue ranking, beat only by jobs/ the economy. Also, I give Kirk the edge because new information on his dealings may still be coming out, whereas the Kirk scandal is already out for everyone to see and the damage is done. Lastly, given the tight race and the likelihood that the large number of undecideds will hold their nose and ultimately vote for Kirk since the Republicans are out of power, I think Kirk has every chance to pull it out if he puts up a good campaign. And a RINO is better than a Democrat any day of the week.

Speaking of RINO’s, good riddance to Lisa Murkowski and Alaskan nepotism. Congratulations to Joe Miller, a man who will stand up for what’s right even if its unpopular and won’t pander to Alaskans with their hands out. I don’t normally appreciate the intra-party feuding that happens, but I like it in the reddest of red states like Utah and Alaska, where RINO’s have been kicked out of the Senate this year. RINO’s in these states simply don’t represent their constituents’ beliefs, and they should go. And we won’t miss them- the primaries are basically the elections in these states, so there is certainly no harm done.

The other minor bone I have to pick with Trende’s analysis is in Connecticut. He says he “wouldn’t be surprised” if Blumenthal (D) loses to McMahon (R). I would be more surprised if he didn’t. Blumenthal was a better than average candidate, but lying about his time in the military has hurt him. McMahon is a very strong candidate who spent upwards of $20 million on a primary that didn’t end up being particularly close. She has pledged to spend whatever it takes to win, and she’s charismatic and female as well, all qualities that should help. I bet this one doesn’t end up as close as say, California or Washington.

Lastly, since I’m from North Carolina, I thought I might have some insight into why Republican incumbent Senator Burr is so weak. The reality is he is the invisible Senator. He’s rarely in the paper and never on TV. He won against Erskine Bowles, the two-time loser who looks like an egghead and is one. Burr is seen as very ineffective, which is the same thing that brought down Elizabeth Dole, who should have won reelection in 2008 on the popularity of her last name. People in North Carolina are tired of people who want to be in the Senate for reasons besides serving the people- whether for their own vanity like Dole, or to run for President like John Edwards, who is extremely unpopular even among Democrats around here. This is the state that sent Jesse Helms, Senator No himself, to Washington for decades. The American Conservative Union may as well have set his vote as the conservative vote and compared everyone else to him. When he voted a way different than we thought he should, we just figured he knew something we didn’t. North Carolina is trying desperately to find a voice in the Senate, and Burr is not and never will be it. Unfortunately, this means he is likely to lose when he’s up again in six years. Kagan just squeaked by a piss-poor Dole campaign in 2008, she’s probably a goner too; people will be eager to vote for any remotely acceptable challenger. Our main problem is that Democratic corruption and gerrymandering prevent most North Carolina Republicans from getting the visibility to run in statewide races, so we don’t usually have a great slate of choices in the primary. Pat McCrory, the former Charlotte mayor who almost won the governorship last year against Bev Purdue, is one great exception. Don’t get me started on Purdue, she’s just vapid and I’ve got the inside scoop on her, she’s even stupider than our last governor Mike Easley, who managed to crash on two separate occasions while touring NASCAR tracks. Somehow, he made it out of both alive. Even our liberal local paper, the News and Observer, endorsed McCrory, which is literally unprecedented for them. At any rate, crooks in the legislature run the state and the governor is one of the weakest governorships in the nation. Its just really, really awful, I mean former leaders of the state Democratic party are in jail and they still enjoy unbroken control of the state. I don’t know how our State keeps growing, but rest assured its despite, not because of, our politicians.

Wow, didn’t mean to go on such a rant there, but corruption will make your blood boil. Here’s hoping voters in Illinois think the same thing.

Update: Forgot to mention that Perdue (excuse my earlier spelling mistake) is also corrupt as the day is long. Of course, the evidence is hearsay and wouldn’t stand in court, but I trust my sources.

Harry Reid, in his infinite wisdom, has scheduled the debate over how to extend the Bush tax cuts for sometime this September, after the Labor Day holiday which traditionally marks when average voters start paying attention to campaigns. Karl Rove had a great analysis of this subject in the Wall Street Journal just a few days ago for some background. For those of you without subscriptions, his main point is that Reid is a fool for scheduling a debate that can only increase the public’s (accurate, in my opinion) perception of Democrats as being “tax and spend liberals.” Another good point, for long-term forecasting purposes, is that he has to abide by the PAYGO rules that Democrats put in place back in 2007, meaning he has to come up with 1.3 trillion dollars in other spending cuts or tax hikes over the next ten years in order to extend just the middle class tax cuts. That can’t be popular, especially with all the low hanging fruit used to pay for new spending already (assuming the unlikely event that those supposed spending cuts for Medicaid and Medicare providers and food stamp recipients ever actually happen). Alternatively, he can ignore the rules and cede the Democrats moral authority to criticize Republicans for not following them if Republicans want “unpaid for” tax cuts later. Of course, ceding the moral authority won’t stop them for long, so my guess is they’ll just drop the PAYGO idea.

Anyway, the point of this post is not how this plays out politically, but what will ultimately happen to the tax rates. Even if you are in the middle class brackets, be aware that everyone’s taxes will go up if Congress fails to act, and even if taxes are only raised on “the rich,” economic pain is not the sort of thing that can be isolated, and everyone will feel the burden of higher taxes. The difference is the size of the tax increase, and whether you feel the effects directly on your tax bill or indirectly through your 401(k) and paycheck.

This is a tough one to call, but I didn’t start this blog to avoid making predictions, so here goes. First of all, everyone agrees something has to be done, and that puts pressure on the leadership to get a bill to the President before January 1, when the rates go up. Of course, it is within Congress’ power to cut taxes retroactively, but its easier and makes more economic sense to pass a bill sooner rather than later. At any rate, the important point is that the pressure is on Congress to act in the near future. Secondly, Reid lacks the votes for cloture without extending the cuts for everyone. With several Democrats speaking out against raising rates on anyone, it is unlikely that a Republican will break ranks. And, for what its worth, Snowe, Collins, and Brown aren’t up for election this year. Three, the Republicans have no incentive to compromise. They like having the debate, its a useful political issue for them, and one on which the Democrats have generally been incoherent. Four, the Democrats have enormous incentives to compromise. If they can’t pass an extension before Republicans take over, then Republicans get to write the law. This is another reason why the Republicans have little reason to compromise.

In summary, the Republicans are negotiating from a position of strength, despite their smaller numbers. It is therefore my official prediction that the tax cuts will be extended for all earners, which is great news for the economy and reduces the chances of a double dip. The question is not so much if they will be extended, but when. If the Democrats wise up, they’ll agree to an extension before the election, which will help them portray themselves as moderate, bipartisan, and doing something about the economy. If they don’t, then Republicans will take care of it a couple months later as the first order of business. I admit, I don’t know whether Democrats will wise up, but I’d put the chances of it at about 2 in 3. Republicans will throw them a bone in negotiations, probably by making the extension last only till 2012 or, more likely, 2013 when Democrats have a hope of being back in charge, and possibly by conceding to minor rate increases that don’t add up to much. Chances, are, the Democrats will accept the bone rather than let Republicans write the bill later without much Democrat input at all.

But David, you say, won’t the middle class blame Republicans if their taxes go up because of an inability to reach agreement with Reid, or later, with Obama? Well, no, because Republicans can hold out for a while, promise to act on the cuts first thing in a new session, and, chances are, even override a possible presidential veto on the matter with the help of enough concerned or shell-shocked Democrats next year.

My answer is simple: of course tax cuts pay for themselves. How can the government letting you keep the money you earned yourself cost you anything? Of course, what liberals mean by asking whether tax cuts pay for themselves is whether the government will have lower tax revenue, i.e. whether it costs the government anything. That’s just another example of people talking right past each other. The Political Class that Scott Rasmussen is so fond of talking about, thinks of tax cuts as a government giveaway. They identify with the government, and so they see tax cuts as “costing them” the money (which isn’t theirs in the first place) they need to pursue the Political Class’ priorities. Say, for the sake of argument, that everyone agreed some tax cuts had been a bad idea, and that the government actually needed the money it had allowed you to keep. Then the government raises taxes and takes the money. How are you worse off than if there had been no tax cuts in the first place? Alternatively, say the government spent a bunch of money which everyone later thought was a bad idea (ring any bells?). There is no undoing the spending, the money is gone, and you have to pay for it regardless of whether it was effectively spent or not. You are demonstrably worse off. That is the difference between spending and tax cuts. Furthermore, one scenario is far more likely than the other. You use your money to your own best interest. Does anyone think the government will husband its resources as carefully as you do yours? Or even that they can deduct an overhead fee and somehow still provide enough services to compensate you for your loss?

Democrats won’t argue that you get bang for your buck from government, but rather make the sleazy appeal that since the rich pay more, you get a lot for your tax dollar. Besides being a morally inexcusable argument, its practically indefensible as well. Big government will always look after the well-connected rich and their big business interests. In reality, they are pitting your interests against the hardworking moderately wealthy, such as small business owners, working professionals, people who worked hard and went into debt to earn advanced degrees, and people who work 80 hours a week and clip coupons to put their kids through college and retire comfortably one day. God forbid these savers want to pass something on to their children. Only a fool could believe society can punish these successful individuals, some likely your own neighbors or employers, and not see everyone pay a price.

Update: This reminds me of something I read the other day about Obama’s recent speech at a GM plant. He said something like “I have put my money on the American worker.” That kind of talk really pisses me off- cause I doubt the people managing the Obama’s fortune have a dime in GM, and anyway, he’s referring to the bailouts which were, say it with me, YOUR money, not his. Grrr.

Democrat Means: “Republicans have no plan to spend money on anything!”

This is just one example of how Republicans and Democrats increasingly talk right past each other. Democrats don’t understand how there could even be a plan that doesn’t involve spending money, therefore, if you have no plan to spend money, you have no plan. They have no trust in the private sector; they don’t see how anything good can happen without the well-meaning government being directly involved. They simply can’t see that having no spending plan to get us out of this economic morass is, actually, a pretty good start on a plan to get us out of this economic morass.

Increasingly, the opposite sides of the political aisle simply don’t speak the same language. They talk, but there is no communication. I blame the way the partisan media allows people to choose what sort of news and opinions they want to hear, in part, and also the ideological divide between the two parties which has been gaping wider and wider for decades now. I probably haven’t pinned the entire list of causes, but those are the explanations I have thought of so far.

Update: Excuse me, where I said “without the well-meaning government being directly involved” I meant, “without the well-meaning government being directly in control.”

The United States is without doubt the greatest project in the history of mankind. I believe that God is on the side of freedom and that we have enjoyed his favor in our grand experiment in democratic government. And, to quote from Romans 8:31, “If God is for us, who can be against us?”

I am writing because I want people to see the United States the way I see the United States. One piece of the evidence that this is a righteous nation is that we are critical of ourselves. In our schools, we do not dwell on the evil and the abuse of human rights perpetrated in the tyrannies of other nations, for we are told in 1 Corinthians Chapter 5 not to judge the unbeliever. We expect no better from these tyrannies, so we do not and should not judge ourselves in comparison to them. Instead, we hold ourselves in comparison to an imagined nation of moral perfection. In my opinion this tendency has gone too far in recent decades. It is quite possible to write an all encompassing narrative of American history based on a race/class/gender critique, for never in American history has America been perfect. This version of American history is not wrong and it even has its uses, but it cannot be the lens through which we see American history, for it misses the point. No nation is perfect, but the United States was the first nation which was founded with its highest purpose being “to form a more perfect Union.”

Just as a Christian does not pretend to be free of sin, but rather prays that God forgive them their sins and deliver them from evil, working each day to be more righteous than the last, so our nation is not perfect but seeks always to hew closer to the path of righteousness. The path is laid out in the preamble to the Constitution of the United States, and the true measure of our nation is not how close we are to perfection but how faithfully we have pursued the purpose for which we were founded. I quote our nation’s mission in full:

“We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.”

The dogged pursuit of these ends is our nation’s history in a nutshell. I love this country because each successive generation of the People of the United States has worked hard to fulfill the promise of our nation’s founding, passing on to the next generation a Union that is more perfect, more just, more stable, more secure, more prosperous, and more free. It was not inevitable and it was not easy. It has been a journey beset by danger time and again, the success of which has required that hundreds of thousands give their last full measure of devotion to preserve our Constitution. It is thanks to the tireless efforts of millions toiling against all odds of success that our nation has gotten to this point. To these men and women of the past we should be humble and thankful, and pray that God gives us the strength to continue their work and be worthy of their trust that we would not allow this nation to perish, but will indeed pass it on as they did a better nation than the one we inherited. There is great doubt among many today that we can accomplish this task. If we look at our history though, we can see that there is great strength in free people, that we have overcome more in the past, and that if we put our shoulder to the wheel God will be on our side.

Update: More evidence that the left does not understand the American project and doesn’t live in the real world.